Dow off 370 as economic fears slam stocks

Stocks suffered their worst losses since last summer after a leaked report on the state of the U.S. service sector showed an economy slipping much more quickly than expected.

The reaction to the Institute for Supply Management's report sparked immediate and persistent selling that affected the entire U.S. stock market.

The plunge offered ample proof that the U.S. stock market remains very fragile despite the biggest one-week rally in five years just last week.

At the close, the Dow Jones industrials had shed 370 points, or 2.9%, to 12,265. The Nasdaq Composite Index was off 73 points, or 3.1%, to 2,310, and the Standard & Poor's 500 Index had fallen 44 points, or 3.2%, to 1,337.

The Dow had lost 108 points on Monday.

Although steep losses can produce a snap-back rally the next day, some analysts say that rising volumes of options to sell stocks are a signal that investors may continue selling Wednesday.

But a decent earnings report from Dow component Walt Disney (DIS, news, msgs) may offer investors some relief. Disney shares jumped nearly 6% to $31.84 in after-hours trading. They'd fallen 2.7% to $30.07 in regular trading.

In addition, foreign markets, especially those in Europe, may offer a signal of where the U.S. market will go on Wednesday.

Stocks in Japan fell sharply in Wednesday trading. The Nikkei 225 Index ($N225) closed down 646 points, or 4.7%, to 13,099. Most other Asian markets markets also suffered sizeable losses.

The Nikkei index has fallen 28% from its July 9, 2007 high of 18,262.

Financial and energy stocks took some of the biggest hits. Principal Financial Group (PFG, news, msgs), a big insurance and retirement fund company based in Des Moines, Iowa, fell 11.2% to $53.10 as turmoil in the financial markets knocked fourth-quarter earnings down 87%. ExxonMobil (XOM, news, msgs) fell 3.9% to $82.11 as oil prices fell. Exxon's loss knocked 27 points off the Dow.

Today's point loss for the Dow was its worst since Aug. 9, when the Dow fell 387 points. The percentage loss was its worst since the index fell 3.3% on Feb. 27. The S&P 500's point and percentage losses were the worst for the index since Nov. 7. The Nasdaq's point and percentage losses were its worst since Jan. 4, when it slumped 98 points, or 3.8%.

With the losses today and Monday, the Dow has retraced about 45% of its 1,108-point gain from its mid-January lows through Friday's close, a worrisome sign for many traders because it suggests there's little investor confidence right now.

The Dow's low on Jan. 22 was 11,635. Friday's close was 12,743.19 The S&P 500 fell to as low as 1,270 on Jan. 23. The Nasdaq's low was 2,203 on Jan. 23.

The S&P 500 has lost 9% so far in 2008 for the worst-ever start to a year in the benchmark's eight-decade history. The Dow is down 7.5% for the year; the Nasdaq is down 13%.

All 30 Dow stocks were lower on the day, and 17 of the stocks in the index contributed at least 10 points to the index's decline. In addition, 481 S&P 500 stocks and just four stocks in the Nasdaq-100 Index ($NDX.X), which tracks big-cap Nasdaq stocks, were lower on the day.

McDonald's (MCD, news, msgs) had the smallest Dow loss, a decline of 4 cents to $53.84. The biggest loser was Citigroup (C, news, msgs), down 7.4% to $27.05.

Casino operator Wynn Resorts (WYNN, news, msgs) was the big Nasdaq 100 winner, up 7.1% to $119.36. Whirlpool (WHR, news, msgs) was the S&P 500 leader with a 10% gain to $90.

Energy prices -- New York close

	Tues.	Mon.	Chg.	Month chg.	YTD chg.
Crude oil (NYMEX) (per barrel)	$88.41	$90.02	-$1.61	-3.64%	-7.89%
Heating oil (per gallon)	$2.4465	$2.4833	-$0.0368	-3.47%	-7.66%
Natural gas (per million BTU)	$7.9400	$7.8690	$0.0710	-1.66%	6.11%
Unleaded gasoline (per gallon)	$2.2621	$2.3117	-$0.0496	-2.04%	-9.18%

A big drop for the services economy

The catalyst for today's drubbing was the Institute for Supply Management report. The ISM said its nonmanufacturing index fell to a reading of 41.9 in January -- a huge drop from the 54.4 reading in December and far below the 53 reading that economists expected. It was the lowest reading since October 2001.

Readings below 50 indicate contraction in the industry. The service sector makes up a bit less than 70% of the U.S. economy.

The ISM report, which was supposed to have been made public at 10 a.m. ET, was released early, before the markets opened, because there were rumors that it had been leaked.

• Get free, real-time stock quotes on MSN Money

The report was so bad that Merrill Lynch predicted the Federal Reserve would be forced to cut rates again before its March 18 meeting.

The Fed cut its key federal funds rate from 4.25% to 3.5% on Jan. 22 to try to support the economy. The central bank followed up with a second rate cut, taking the fed funds rate to 3% on Jan. 30. Stocks rallied strongly over the next two days.

The fed funds rate is the rate banks charge each other for overnight loans and is used by banks and lenders to price loans to businesses and consumers.

Respondents to the organization's survey said they were starting to see slower business activity. They also said they were seeing more inflationary pressures, particularly from energy prices.

But fewer than 15% of respondents said that turmoil in financial markets was affecting their ability to obtain regular or additional financing.

Disney: Economy isn't hurting results

Walt Disney shares moved higher after the company posted a quarterly profit far above Wall Street targets on strong results for its theme park, media and consumer-products groups.

• StockScouter: Disney and 9 other timely stocks

Disney's media business saw a drop in costs as a result of the Writers Guild of America strike -- which began about a month into the quarter -- but no negative impact on ad sales so far, Chief Financial Officer Tom Staggs told reporters on a conference call.

There was no sign that the U.S. economic downturn had affected consumer products sales or theme park bookings, Staggs said.

"Our bookings are modestly ahead of last year at this point, and we are pleased with their performance so far," Staggs said. "Pricing on hotel (rooms) is slightly ahead of last year."

Disney said it earned $1.25 billion, or 63 cents a share, down from $1.7 billion, or 79 cents per share, a year ago. The year-earlier results had been boosted by the sale of interests in Us Weekly and E! Entertainment. Revenue rose 9% to $10.5 billion.

Earnings topped the Wall Street consensus estimate of 52 cents, Reuters said.

Disney's media business operating profit rose 28% to $908 million, and parks profit rose 25% to $505 million. Studio income dropped 15% to $514 million, but consumer products showed a 38% rise in profit to $322 million.

While the stock was moving nicely higher in after-hours trading, the stock had fallen 16% from a high in May, compared with a 9.3% decline for the Dow.

Crude oil, gold fall

Worry about the economy spread to commodities today. Crude oil in New York fell $1.61 a barrel to $88.41; crude had been as low as $87.50. Gold was down $19.10 an ounce to $890.30 in New York.

Crude drop actually lent some support to airline and transportation stocks, which move against swings in oil prices. The Dow Jones Transportation Average ($DJT) fell just 1.3% on the day. The Amex Airline Index ($XAL.X) was down just 1.4%. The best-performing index of stocks that Market Dispatches watches was the Morgan Stanley Healthcare Payors Index (HMO), which tracks health-maintenance-organization stocks. It was down only 1%.

Today's losses means a turnaround is not yet at hand, one analyst said.

"Even though we averted the worst start to any year on record, the 6% January decline in the S&P 500 was the poorest showing since 1990," Merrill Lynch North American Economist David Rosenberg wrote in a note to clients late Monday.

• Video: Real estate and party politics

Some analysts are recommending that investors build positions now to take advantage of an expected "V-shaped recovery in the second half of the year," Rosenberg wrote -- but he also warned that "recessions usually last 10 months, not six months, and the time to start pricing in the recovery is usually in the sixth month, not the first month."

Investors will be focusing on Thursday's weekly jobless-claims report, Newedge Financial's George Dowd told CNBC; Monday's Challenger, Gray & Christmas report showed a 69% jump in job cuts last month. Challenger's report said that the 74,986 job cuts in January was the highest number since August.

Continued: BHP Billiton launches a bid for Rio Tinto; Yahoo is downgraded

 1 | 2 | next >